Commercial Due Diligence Cannot Be Overlooked When You Decide to Acquire a Company

When acquiring another company, you have to cross-check every piece of information and detail before you sign the papers. Commercial due diligence can help you learn many essential aspects that would otherwise be difficult to access.

Here are some practice tips you should follow during the diligence process to have all the details necessary to make the required decision.

Understand the current market and the target company’s position

The market trends are constantly changing. What was prevalent yesterday may not be valid today. At the same time, you must ensure that the target company enjoys a good reputation in the market. If the market feedback is not good and no one is willing to do business with the company, then buying it may not be a good decision. Try to understand the market dynamics and the market share occupied by the target company. This understanding will keep you informed and aware of the risks and opportunities. Would acquiring this company and merging it with your company prove to be beneficial for your company’s growth in the long run? If not, then stay away from the acquisition.

Find out more about the business model and the target company’s go-to-market strategy 

You need to check its elevator pitch to understand its business model. What is their client retention strategy? How do they deal with their customers and clients? You should speak with the senior management and collect as much information as possible to clear all your doubts and confusion right at the start. At the same time, you should interact with the company’s sales executives to determine how they implement their market strategies and deal with market challenges and threats. This again will. Give you a clear idea about the overall performance of the target company.

Check the client list and learn more about the revenue development assumptions

Three things are essential here—CAC, CLV, and churn—in other words, customer acquisition costs and lifetime value. Once you have these data, it will become easier for you to understand the marketing and sales basics of the target company.

In addition to the essential practices mentioned, there are several other critical aspects to consider during the commercial due diligence process:

Assess the Financial Health

1. Review Financial Statements: Examine the target company’s financial statements, including balance sheets, income, and cash flow statements. Look for any inconsistencies or red flags that might indicate financial instability.
2. Audit Reports: Obtain and review any recent audit reports. This will help you verify the accuracy of the financial information provided and identify any potential issues.
3. Debt and Liabilities: Analyze the company’s debt levels and liabilities. Understanding the extent of the target company’s obligations will give you a clearer picture of its financial health.

Operational Due Diligence

1. Operational Efficiency: Evaluate the efficiency of the company’s operations. Are there areas where processes can be streamlined, or costs can be reduced?
2. Supply Chain: Investigate the robustness of the company’s supply chain. Are there any risks associated with suppliers or logistics that could impact business continuity?
3. Technology and Infrastructure: Assess the quality and scalability of the company’s technology infrastructure. Determine if it can support future growth or if significant investments will be needed.

Legal and Regulatory Compliance

1. Legal Obligations: Review all contracts, agreements, and legal obligations of the target company. This includes customer contracts, supplier agreements, leases, and employment contracts.
2. Regulatory Compliance: Ensure the company complies with all relevant industry regulations and standards. Non-compliance can lead to significant fines and damage to reputation.
3. Intellectual Property: Verify the ownership and status of any intellectual property, including patents, trademarks, and copyrights. Ensure there are no ongoing disputes that could affect ownership.

Cultural Fit and Human Resources

1. Company Culture: Assess the cultural fit between your company and the target company. A match in company cultures can lead to integration challenges and employee satisfaction.
2. Employee Retention: Evaluate the target company’s employee retention rates and workforce satisfaction levels. High turnover rates could indicate underlying issues.
3. Key Personnel: Identify key personnel critical to the target company’s success. Determine their willingness to stay post-acquisition and any potential retention strategies.

Risk Assessment and Mitigation

1. Identify Risks: Conduct a comprehensive risk assessment to identify any potential risks associated with the acquisition. This includes market risks, operational risks, and financial risks.
2. Mitigation Strategies: Develop strategies to mitigate identified risks. This could involve creating contingency plans, securing insurance, or setting aside reserves to address potential issues.

Synergy Potential

1. Cost Synergies: Identify areas where costs can be reduced through synergies, such as combined procurement, shared services, or consolidation of facilities.
2. Revenue Synergies: Look for opportunities to increase revenue through cross-selling, expanded market reach, or enhanced product offerings.

Post-Acquisition Integration Plan

1. Integration Plan: Develop a detailed post-acquisition integration plan outlining the steps to integrate the target company into your organization. This should cover all aspects, from operations and IT systems to culture and human resources.
2. Timeline and Milestones: Set clear timelines and milestones for the integration process. Track progress regularly and address any issues promptly.

By incorporating these additional points into your commercial due diligence process, you will be better equipped to make an informed and strategic decision regarding the acquisition.

Summing it up

Please do not take any rash decisions when it comes to acquiring a company. Think through everything, and discuss every point with the key members of your company. Have multiple brainstorming sessions. If required, have a detailed discussion with the key players of the target company. Ask your market team to conduct the necessary research and provide an in-depth report on how beneficial it will be for you to acquire the target company. Go through the report and then take the call. And to make this detailed report, you must also depend on commercial due diligence. It is best to leave this work to the experts. Their expertise will ensure a thorough and accurate assessment. There are many prominent service providers in the market. Get in touch with any of them and ask them to start the process immediately. Please find out how many days it will take to complete the process and the cost.